Series 79: Chapter Five

Chapter Five

Due Diligence

Due diligence is the process of investigating and understanding a company’s business in as much detail as reasonably possible. How much diligence is “due” depends on the specific type of transaction and the nature of the business in question, but due diligence almost always involves taking a hard look at a company’s finances, its strategic and operational situation, and any problems or risks it faces.

Due diligence serves a dual purpose. First, it helps firms do their job better. Second, it may reduce legal liability arising from situations such as false statements made on registration statements or other SEC filings. Of course, due diligence increases the likelihood that false information in filings will be caught and corrected, but it also may protect firms from legal liability in a more direct fashion. The 1933 Act allows a due diligence d